What Are the Advantages of Dollar Cost Averaging?

When markets get a little too volatile for your liking, it may be a particularly good time to adopt a disciplined investing approach.

As opposed to “right-brain” investing, when you might act mainly out of instinct, a disciplined approach is a pre-set investing pattern that you commit to follow.

It may not be as much fun as acting out of intuition. And it may involve digesting some pride. But disciplined investing could help keep you out of trouble, and even position you well in the market.

Deciding on Dollar Cost Averaging

Instead of trying to guess market highs and lows — a feat no one has ever really mastered — why not invest the same amount of money at regular intervals over a lengthy period of time?

For example, let’s say you set aside $200 every month to invest in a mutual fund. The first month, your fund sells for $10 per share, and you pick up 20 shares. By the next month, the market’s down, the fund drops to $9 per share, and you buy 22.2 shares. The next go round, the market regains lost ground and the fund is back up to a $10 share price. You pick up another 20 shares.

So what’s happened up to this point? The bottom line is that the average share price was higher than your average share cost. That’s because you bought fewer shares when your stock was higher and more when it was lower. And that’s the very essence of dollar cost averaging.

But It Will Only Work If...

This is a long-range plan, as is hinted at by the word “averaging.” In other words, the technique’s best use comes only after you’ve stuck with it for a while.

Patience and persistence are the operative words here. Don’t let the market rattle you into changing your battle plan.

When other panicky investors are scrambling — wanting out of the market because it has declined, wanting into it when it has risen — you’ll just keep investing a set amount every month or quarter or whatever interval you’ve set.

Note: Dollar cost averaging does not ensure a profit in rising markets and does not protect against a loss in declining markets. This type of investment program involves continuous investment in securities regardless of fluctuating price levels of such securities. Investors should consider their financial ability to continue their purchases through periods of low price levels.

This material was written and prepared by Emerald Publications.
© 2008 Emerald Publications

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